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Mean-Variance Portfolio Allocation with a Value at Risk Constraint

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Author Info

  • Sentana, E.

Abstract

In this paper, I first provide a unifying approach to Mean-Variance analysis and Value at Risk, which highlights their similarities and differences. Then I use it to explain how fund managers can take investment decisions within the well-known Mean-Variance allocation framework that satisfy the VaR restrictions imposed on them by regulators. I do so by introducing a new type of line to the usual mean -standard deviation diagram, called IsoVaR, which represents all the portfolios that share the same VaR for a fixed probability level. Finally, I analyse the "shadow cost'' of a VaR constraint.

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Bibliographic Info

Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 0105.

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Length: 17 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:fth:cemfdt:0105

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Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
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Web page: http://www.cemfi.es/
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Related research

Keywords: RISK ; MANAGERS ; INVESTMENTS;

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Cited by:
  1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
  2. Grau-Carles, Pilar & Sainz, Jorge & Otamendi, Javier & Doncel, Luis Miguel, 2009. "Different risk-adjusted fund performance measures: a comparison," Economics Discussion Papers 2009-54, Kiel Institute for the World Economy.

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